calculating lump sum when there is unreduced early

[Guest ctrapatsos]

hi

a plan has a normal retirement age of 65+5 but an unreduced early retirement of age plus service equals 80..

If a person terminates employment at age 45 with 25 years of service, would we calculate the lump sum today based on full commencement at age 55 (when age plus service equals 80) or would we base it on a deferred benefit payable at age 65 (since he CURRENTLY does not satisfy age plus service equals 80)?

and, if the current lump sum IS based on a deferred to 65 benefit, it seems like we should disclose to the participant that if they wait, they will get a huge bump up at 55 when they can get an unreduced benefit/lump sum? (in order to satisfy the "consequences of failure to defer" language)

and i guess a further extension of the question would be how to handle funding calculations? could we/should we take into account this future unreduced early? (if a participant is 54 and the lump sum is based on a deferred to 65 benefit but then the following year he is entitled to an immediate unreduced benefit....seems like the plan could suddenly become underfunded if we dont somehow account for the unreduced benefit)

thanks for your help

chris

[Effen]

You need to check the plan document to see what it says. Also, I would ask about past practice. I have seen it done many different ways.

it seems like we should disclose to the participant that if they wait, they will get a huge bump up at 55 when they can get an unreduced benefit/lump sum? (in order to satisfy the "consequences of failure to defer" language)

- Absol-fn-lootly. That is what the "relative value" requirements and the "consequesnces of failure to defer" are all about. You are required to put this information into the benefit illustration package.

could we/should we take into account this future unreduced early?

0 another absol-fn-looty. All of your assumptions need to be your best estimate, including retirement rates and expected form of payment. Depending on your system, these may or may not be possible. If they are not possible using your current software, you may need to rethink your software vendors. Typically on a plan like this we would look at the recent experience to see what percentage retire at what age. For example, you may have an assumption that 75% retire when they are eligible for the rule of 80 and the other retire at various rates. Of those retiring 60% will elect a lump sum and 40% will elect an annuity. This may change with age and service.

[Andy the Actuary]

hi

a plan has a normal retirement age of 65+5 but an unreduced early retirement of age plus service equals 80..

If a person terminates employment at age 45 with 25 years of service, would we calculate the lump sum today based on full commencement at age 55 (when age plus service equals 80) or would we base it on a deferred benefit payable at age 65 (since he CURRENTLY does not satisfy age plus service equals 80)?What does the Plan say?

and, if the current lump sum IS based on a deferred to 65 benefit, it seems like we should disclose to the participant that if they wait, they will get a huge bump up at 55 when they can get an unreduced benefit/lump sum? (in order to satisfy the "consequences of failure to defer" language)This would be a client decision

and i guess a further extension of the question would be how to handle funding calculations? could we/should we take into account this future unreduced early? (if a participant is 54 and the lump sum is based on a deferred to 65 benefit but then the following year he is entitled to an immediate unreduced benefit....seems like the plan could suddenly become underfunded if we dont somehow account for the unreduced benefit)You would value in accordance with the probabilities of retiring taking into account the subsidies

thanks for your help

chris

[AndyH]

If I may jump in and expand upon the questions.....

Agree with the responses, of course.

But, I have seen documents that are silent with respect to recognizing or not recognizing the subsidized ER benefit, with no known past practice.

Questions:

(1) Is a subsidized ER required to be recognized?

(2) Can the lump sum be based on an immediate annuity, ignoring the deferred annuity?

(obviously the early retirement factors would need to be different for this to be an issue here).

I think the answer to both is no but I know at least one actuary who adamantly disagrees with my answer to 1 as No.

Comments?

[david rigby]

Not sure if I understand the emphasis in your Q, but here goes:

1. Required? Do you mean for funding, or for LS? For funding, I think the answer is NO, but that is a function of a reasonable retirement decrement. For LS, it is/should be based on plan definition.

2. Yes, if you include the condition that, the PV of ER-reduced immediate annuity should not be less than the PV of unreduced NRD annuity.

Is that the gist of your Q?

[AndyH]

Yes, thanks. I agree.